Testimony on Senate Bill 8 before the Senate Ways and Means Committee

March 05, 2019

Testimony on Senate Bill 8 before the Senate Ways and Means Committee

March 05, 2019

Good morning, Chair Terhar, Ranking Member Williams and members of the committee. My name is Wendy Patton and I am a senior project director of Policy Matters Ohio, a nonprofit, nonpartisan organization with the mission of creating a more prosperous, equitable, sustainable and inclusive Ohio. Thank you for the opportunity to testify. We oppose Senate Bill 8, which would add a state incentive to the deep federal subsidy for Opportunity Zone development. We oppose it because as currently structured, it is unlimited and could become a drain on state resources. We also oppose it because it does not address weaknesses of the federal Opportunity Zone program, which lacks accountability standards and could harm low-income residents of Opportunity Zone census tracts by driving up rents and driving out existing businesses. Finally we oppose it because it is not necessary to add to the already-significant federal subsidies of Opportunity Zones.

There are other ways the state could help low-income residents: By increasing investment in public transit, quality childcare and early education and public health measures like lead abatement, for example. Sweetening the pot for federal Opportunity Zone investments will not help unless the state investment leverages projects designed to meet the needs of low-income residents of the Opportunity Zone census tracts. The bill has measures to assure enhanced state and local tax revenues, but not other measures.

The Center on Budget and Policy Priorities, which for over 30 years has been the strongest national voice for programs that protect families of low and modest incomes, describes the problems of the Opportunity Zone program as follows:

The central feature of the Opportunity Zone program is a package of capital gains tax breaks, which overwhelmingly benefit a small group of individuals who are already doing well. More than two-thirds of capital gains income nationwide goes to the wealthiest 1 percent of households.

Participants can get the biggest tax break by targeting investments to areas where they can expect to gain the greatest profits. This means that the program largely strengthens the incentive to invest in areas that already had strong growth prospects rather than guiding investments toward the communities with the greatest needs.

The program does not include any protections to ensure that companies receiving tax benefits hire current residents of the struggling communities where they are located, or that they offer decent wages or benefits.

The way the federal incentive is structured, investors will get a modest return through deferral of initial capital gains taxes, but a potentially significant return with the forgiveness of any additional capital gains that result upon exit from the Opportunity Fund investment. This means investors will be incentivized to seek out the deals with the highest long term yields, which are not likely to be the projects that bring about benefits for low-income communities. Tax incentives will not differentiate between census tracts that need state intervention to attract development and those that are developing on their own, and will be further stimulated by the federal program. Other census tracts are far more in need of state investment.

In Ohio’s low-wage economy, almost half (43 percent) of all census tracts were eligible to be in an Opportunity Zone, because they qualified as a “low-income community.” The federal law allowed each state to select just 25 percent of eligible tracts for opportunity zone status: in Ohio, 320 tracts were selected.

Policy Matters compared designated Opportunity Zone tracts with the 25 percent of Ohio census tracts with the highest poverty rates. Of these, 213 tracts were selected to be in Opportunity Zones, but most of the poorest 739 poorest tracts did not make the cut. Some selected Opportunity Zone tracts have significant investment and gentrification already happening, without tax subsidy. The danger is that all the Opportunity Fund money will flow to those places, without providing benefit to low-income residents of even those tracts. The state doesn’t need to participate in further stimulating development in rapidly developing places.

If state legislators want to help low-wage workers and their families, they should first and foremost provide sufficient funding for health and human services in the budget for 2020-21 so people of low incomes living in places of concentrated poverty can get public transit, child care, affordable housing, student aid, food aid, homelessness prevention, and other public services essential to low-wage workers and families in Ohio’s huge, low-wage labor market. If state lawmakers wish to participate in Opportunity Zone investment, it should not be through the tax code but through a grant program funded by economic development funds, ideally from JobsOhio, and targeted to all of the poorest census tracts in the state, not just those with significant new shovel-ready investment and deep federal subsidy.

Ohio already foregoes far too much revenue on tax breaks: $9.4 billion in 2019, more than the state spends on Medicaid, more than it spends on basic educational funding sent out to Ohio’s school districts. Spending on tax breaks grew, adjusted for inflation, by 18.3 percent between 2011 and 2018, while inflation-adjusted, state-source spending on public childcare, higher education and non-Medicaid human services fell. State spending on human services did not fall because an improving state economy benefitted everyone. Poverty in Ohio remained almost 15 percent higher in 2017 – the most recent year for which we have census data - than in 2006.

Tax breaks and tax cuts as a strategic policy have brought significant benefits for the wealthiest Ohioans, yet poverty in the state has not been reduced to pre-recession levels. If the state wishes to participate in funding of projects in low-income census tracts, it should focus on all of them – beyond Opportunity Zones – and should use economic development grant funds to do so. This would be a good initiative: Ohio’s Community Reinvestment Act areas and enterprise zones are used in places without need for subsidy. The state has not succeeded in targeting investment in its most distressed areas. This is an opportunity to do so in an accountable way.